Kurlak oggi - gz
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By: GZ on Giovedì 20 Maggio 2004 02:19
Da quatro anni a questa parte nei punti critici del Nasdaq e del settore tecnologico in genere ho sempre fatto caso agli interventi "strategici" del Thomas Kurlak, il guru dei semiconduttori.
Ogni sei mesi circa nei momenti di massima tensione del mercato il Kurlak (ora ritiratosi a vita privata con un mucchio di soldi) piazza i suoi interventi e due volte sue tre ho notato e fatto notare che coincidono con dei punti di svolta.
Non ho tempo di riassumere, ma oggi ha dato la zampata, solo che sembra più tiepido del solito (in ogni caso riassume tutto ottimamente). Ma anche lui dice: se i tassi di interessi sul Treasury bond smettono di salire per l'estate siamo OK.
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What's Been Troubling the Techs
By Thomas Kurlak
(Tom Kurlak is the former semiconductor industry analyst for Merrill Lynch, now retired. For 19 consecutive years, Kurlak was on the Institutional Investor All-Star Team until his departure for Tiger Management in February 1999.)
I remain optimistic about tech over the course of this cycle.
Some issues need to be resolved before a sustained move higher can start.
This year, tech company fundamentals have played out about as I'd hoped. However, the stocks have been down and just can't seem to generate a rally, even on very good news. What trouble does the "market" see ahead, and what is just a normal correction after a big year of gains in 2003?
Over the years, technology -- particularly semiconductor -- stocks have been good barometers of investor confidence. They have always led economic and market upturns and downturns. In addition, gold stocks have been good barometers of investor pessimism about future trends in inflation, profits and the dollar.
So far this year, we've had both weak semis and weak gold stocks, and that would be an apparent contradiction. When it comes to the future, are investors simultaneously bearish (falling tech stocks) and bullish (falling gold stocks)? Or do gold investors expect that inflation won't increase much because rising interest rates will choke off the recovery? That would also explain why tech investors would be bearish.
The Stop-Go Economy
That brings us to an interview with George Soros that I read last December. In that interview, Soros didn't like the outlook for U.S. stocks or bonds. What he saw was an economy propped up by too much borrowed money and very dependent on low interest rates. He predicted that as soon as employment increased, rates would rise rapidly and stall the recovery. He compared the U.S. to the stop-go economy of the debt-burdened U.K. in the 1980s.
So far, Soros' forecast has been fairly accurate, to the dismay of American investors. While we've gotten the earnings in 2004 that we wanted from tech companies, we haven't gotten the expected appreciation -- and for the same reason gold investors have been disappointed: Rising interest rates may cool the recovery and inflation. So how will tech companies be affected?
Total U.S. inventories are at record low levels relative to sales, and this is the point in the economic cycle when rebuilding inventories is necessary to achieve sales growth. So commercial and industrial bank loans are on the rise to finance higher inventories, which means that as the Federal Reserve raises interest rates, interest expenses will be a bigger drag on profit margins. That's one reason the increase in Cisco's (CSCO:Nasdaq) work-in-process inventory concerns investors. Plus, the company may not need it if demand slows.
What about long-term rates, where the market has already adjusted sharply higher? Rates are up by about one-third in two months, to 4.65% for 10-year government bonds. The long market is where businesses borrow to finance capital expansion, and higher rates on more borrowing for capacity growth will show up in profit-margin pressure down the road. Even if companies are flush with cash, as many are, they still incur an opportunity cost in lost interest income when they use it instead of borrowing.
Basically, higher interest rates in a growing economy mean lower profit margins, all else being equal. To the extent tech companies need to grow inventory and capacity, margins can be expected to be under pressure as rates rise. And many companies are at historically high margins already, very early in the cycle. The question then is, where's the leverage? Can more margin improvement be expected from near-record levels with rates rising?
For the semis, higher chip prices usually show up during the shortage stage of the cycle in time to hide rising costs such as interest expense. It remains to be seen how that will play out this time. So far in 2004, first-quarter data show average chip pricing up 5% over the year-ago quarter. The majority of growth is still coming from surging unit sales, which were up 26%.
The Trouble With 'Wintel'
Aside from interest rates, what else can be concerning investors in tech stocks? Are there worrisome trends in technology? I see two trends getting wider coverage lately, which are affecting two of tech's biggest stars, Microsoft (MSFT:Nasdaq) and Intel (INTC:Nasdaq) . For Microsoft, it's Linux, the free operating system software available over the Internet. For Intel, it's consumer and industrial electronics eclipsing the personal computer as the semiconductor growth engine.
Both trends are slowly eroding the value of the "Wintel" monopoly. As Linux takes market share from Microsoft and the PC market continues to mature for Intel, the future long-term growth of both companies is coming into question. And in Intel's case, management has added to that thinking by recently canceling a new microprocessor and declaring the end of the megahertz race.
Besides interest rates and valuation altering technology trends, the stop-go economy that Soros predicted may be starting to show up in slower April retail sales and plateauing consumer confidence. Coincident with those two reports has been forward guidance by tech managements of less sales growth in the second quarter than in the first. On a micro level, computer memory prices have weakened in recent weeks. While Dell (DELL:Nasdaq) reported that higher DRAM prices hurt its first-quarter profit margin, DRAM spot prices have fallen 22% to $5.10 since about April 12. This could foreshadow a softer PC market this summer.
So did we miss a good selling opportunity last fall, or was it just a short-term trade that long-term holders can disregard? If the economy has a slowdown in the second half, then it was a missed opportunity. If interest rates do not spike further and consumer confidence rises from here, then tech stocks can resume their cyclical recovery as the stock market regroups and moves higher with the economy.
We'll get more clarity in the months ahead. Meanwhile, here's where tech investors should be focused:
Look for signs of a stop-go economy, rather than just assuming the economy will grow smoothly, as is still the consensus.
Watch guidance by managements on profit margins, which have historically been a leading indicator for tech profit growth.
Pay more attention to DRAMs now that prices are weaker. While consumer and industrial electronics has become the new semi demand driver, PC sales trends still affect a large chunk of the chip industry, and DRAM prices are a good measure of PC market health.
Analyze closely the investment implications of the aging of the "Wintel" monopoly. Investors will probably need to adjust their portfolio mix of tech holdings more toward companies serving the consumer and industrial electronics markets.
I remain optimistic about tech stocks over the course of this cycle. But I see investors asking reasonable questions, after such strong relative performance last year, as interest rates head upward. Some of the issues raised here probably need to be resolved before a sustained move higher can begin.
It will take some more patience, and we should prepare for possibly slower near-term growth. But that wouldn't be the end of the world, because the stocks are discounting something bad already.
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